The average retail investor is notorious for trying to time the market—and for doing a remarkably poor job at it. Rather than wait for incontrovertible evidence of a bull market, your clients should probably be getting back into risk assets now.
True, the European debt crisis remains unresolved, and China’s growth is slowing, but there is ample evidence that North American equities—and several emerging markets as well—should fare well in 2012.
The challenge for advisors is that clients may be paying too much attention to noise over Europe and China, according to Jack Ablin, chief investment officer, Harris Private Bank in Chicago. Fortunately, headline noise will lose much of its power to enthrall investors—at least until a major development occurs.
“We’ve become immune to the news, as long as it stays the same,” he says.
“There will be a European recession of some vigour,” says Paul Taylor, chief investment officer, BMO Harris Private Banking in Toronto. But 2012 should see a decoupling of the EU from North America, which should provide “a decent outcome for capital markets”. He calls for U.S. growth of between 2% and 2.5%, which he calls “positive, but not robust”.
The U.S. is embarking, ever so slowly, on the virtuous cycle of growth, says Ablin. So far, the growth has been fuelled by unprecedented federal spending and accommodative monetary policy.
“It’s clearly not a sustainable strategy, but one that we hope will at least jump-start the economy and get some traction,” he says.
And it appears to be working. Employment data has been steadily improving, as have both consumer and business spending.
Corporate profit growth has been strong south of the border throughout the past year—based on earnings, the S&P 500 should have gained 9.5% in 2011, says Ablin, but again, headline noise scared investors off.
As investors take a closer look at corporate fundamentals, that 9.5% gain should materialize. If earnings growth remains strong, investors should expect even stronger gains. Taylor says earnings can expand by mid- to high-single digits on S&P 500.
While cautious investors were rewarded by defensive sectors, such as consumer staples, in 2011, so far that kind of allocation hasn’t panned out in 2012, says Taylor.
“It’s a risk-on environment, but too soon to jump in with both feet on pro-cyclical bias,” he says, and the firm’s model portfolio is currently at the middle of its equity weighting range. “We might be too cautious, actually.”
Ablin says he expects to start buying increasing the equity weighting “in the next couple of days.”